Published on Wednesday, July 27, 2022

Europe | Climatic stress tests: A long journey has just begun

In the first week of July, the European Central Bank (ECB) published the results of the first climate risk stress test for European banks, with results showing significant progress. In contrast to the annual stress exercises it conducts, there are no passes or fails.

Key points

  • Key points:
  • In fact, no individual results are published for the 104 entities that participated. There are not even results for the aggregate of banks in each country, nor have results been published with the impact on banks' capital, which is the star metric in a usual stress test.
  • According to the ECB, the main objective of this exercise was to explore from different perspectives the degree of preparedness of European banks to face and manage climate risks, taking into consideration quantitative and qualitative elements. The aim was to raise awareness among banks and the market about climate risks and the need to adapt, develop and improve the measurement of climate risks.
  • One of the main recommendations made by the Supervisor is to invest in the collection and quality of data, developing an infrastructure that allows an adequate assessment of its clients’ emissions. Undoubtedly, good data is a necessary condition for a proper analysis and for drawing relevant conclusions.
  • An interesting outcome is the proportion of net interest income that depends on the 22 most greenhouse gas-intensive sectors of activity, which on average is more than 60% (median 65%).
  • In the present edition, the results will only be used qualitatively in the annual supervisory evaluation process. However, in the future, it is expected that these exercises will be more stringent and may have binding consequences for poorer performing banks.

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